Rising Dollar, Rising Interest Rates, Falling Farmers

June 21, 2007

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June 21, 20/07

Two pieces of economic news this past week bode poorly for farmers, and both of them relate to factors far beyond their control. One is the continuing rise of the Canadian dollar against its American counterpart. The dollar neared 92 cents American, a level not seen since 1977. Many analysts are saying the loonie could reach par with the American dollar before the end of 2007. The second piece of news concerned Canada's inflation rate. The so-called core inflation rate hit 2.5% in April, furthering speculation that the Bank of Canada will raise interest rates.

Both situations have severe repercussions down on the farm. Grain on international markets is mainly priced in American dollars. Thus each increase in the value of the Canadian dollar effectively lowers the value of Canadian grain on export markets. Should the Canadian dollar reach par with the U.S. currency, Canadian grain prices could effectively fall by $18 per tonne. (Imagine the outcry if freight rates were to rise this much in a year.) There are equally severe implications for the price of hogs, since much of Canada's production is exported to the U.S. Already suffering from rising feed prices, hog farmers will see their industry devastated by the dollar's upward surge. Cattle prices will also be affected, as the U.S. is a major customer for both fat and feeder cattle. The rising Canadian dollar will generate lower calf prices this fall.

On top of the dollar woes, the Bank of Canada is poised to increase interest rates to dampen Canada's economic growth, and hence its rising inflation. Farms in Canada currently owe some $52 billion to lenders, a seven-fold increase from 1981 levels. A one- percent rise in interest rates would whack $500 million dollars from already weak incomes of farmers.

Canada's news media seemed happy in a loony kind of way about the rising dollar. The notion that we may soon equal the American dollar seems to raise a perverse kind of pride in the people who yap away on the radio. They seem oblivious to the serious implications for farmers. A search of news stories on the rising loonie and impending interest rate hikes failed to turn up any references to the effects on the farm. The newspapers dwelt instead on the bad news for Canadian manufacturers, the tourist industry and forestry. Analysts also found good news in the rising dollar, as it would make travel to the U.S. cheaper, and should lower the cost of imported consumer goods.

Rather than celebrate the rise of the loonie, Canadian politicians should ponder the wisdom of a country like China, where currency controls have kept yuan low against the American dollar. The result has been a booming export market and sizzling economy. The Americans themselves don't seem to mind the deflation of their currency. In fact, their manufacturing sector is more competitive with imports and their ag sector has benefited greatly.

To add insult to injury, the rise in both the dollar and inflation rates in Canada stems to a large extent from the province of Alberta. Alberta's booming economy is causing housing prices to soar, a key factor in inflation indexes. Alberta has the strongest economy in Canada, and much of the reason for the rising loonie is the skyrocketing price of oil. The province causing these economic changes is the one that can most withstand their effects, and hence the one that will suffer least. The rest of Canada will pay the price for Alberta's prosperity.

Even Alberta farmers will be affected less than farmers in the rest of Canada. Buoyed up by huge oil revenues, the Alberta government is dolling out money to its farmers in amounts other provinces can't hope to copy.

The notion of raising interest rates to curb inflation always struck me as counterintuitive. All businesses rely on credit. When interest rates rise, the cost of producing goods rises because of the increased cost of credit. Most businesses are able to pass the increased cost on to their customers by raising the cost of their products. This, of course, increases inflation! Farmers, other than those in supply managed sectors, can't pass on any cost increases. Thus, rising input costs, due to interest rate hikes, come to rest squarely on their shoulders. As if they aren't already carrying enough of a burden…